Deutsche Bank & CLSA see acche din for steel sector

MUMBAI: Leading brokerages CLSA and Deutsche Bank see good days for steel sector going ahead owing to a combination of factors such as improvement in asset utilisation, regulatory support against imports and improving cash flows.

“Utilisation rates for Indian steel rose 430 bps to 78% in FY17 ­ the sharpest YoY (year-onyear) improvement in the past decade. We expect this momentum to continue in FY18 with utilisation rates rising by 433 bps YoY to a seven-year high of 82.4%,“ said Deutsche.

Hong Kong-headquartered CLSA sees overall improvement on the capital expenditure front in the metals space in FY19 and expects aggregate annual sector capex to rise to $8 billion by FY20 from about $4.7 billion in FY18.

Companies are regaining con fidence to invest again with focus on projects that can give high return on capital employed, CLSA said. The brokerage added that while non-ferrous companies such as Hindalco, Vedanta and Nalco have firmed up growth plans, steel firms' capex should also start soon.

“India will need to start construction of 5-6 mt of steel capacity each year starting FY18. With their relatively better balance sheets, Tata and JSW are likely to be the main companies driving this investment.“

According to Deutsche Bank, weak demand remains the only missing factor in the recovery sto ry for the steel sector. With demand being weak due to stretched balance sheets and over-capacity in many industries, domestic demand recovery will need to be led by government capital expenditure followed by private capital expenditure, the bank said.

PREFERRED PICKS

For Deutsche, JSW Steel remains a preferred pick in the metals space due to high visibility of earnings thanks to ramping up of new commissioned capacity and improving product mix.JSW is also the only company on which it has put a 'buy' rating.

On Tata Steel, the brokerage has maintained a `hold' rating as it seeks more clarity on resolution of the pension fund deficit.Deutsche has maintained 'hold' on Jindal Steel as well. While Jindal Steel will benefit from government's focus on infrastructure and rising volumes, the stock is fully valued.

The brokerage has maintained a `sell' rating on the stock as improvement in profitability remains elusive.

CLSA has a `buy' on Tata Steel, JSW Steel and Vedanta with target price of ` . 185 and ` . 500, ` . 340, respectively. On JSW Steel, CLSA has an `outperform' rating with a `. 230 target price.